Accounting is not driving business.

Over time, we have met many business leaders trying to run their companies with numbers. Some of them based solely on the information they get from their accounting software. What's the purposes of using a performance management solution, or a decision-making tool, then?

These discussions have intensified since we have been interfacing with accounting software (Xero, QuickBooks Online, Sage Business Cloud Accounting.

If for the figure's professional - like an accountant, a CFO or a business controller-, accounting might be more than enough to run a company, this position could only lack nuances. They could learn a trick or two, or better serve their clients with a different perspective.

In short

Accounting is not intended to help run a business, nor prepare it for the future. Its only purpose is to account for changes in the company's assets and liabilities between two dates.

What is a business management tool?

Dashboards aim to help managers better manage their company. Your dashboard should be a vector for communicating strategy, based on the concept of performance indicators, and monitoring the performances for brighter tomorrows.

Do you want to start your own dashboard? Terrific idea! You have all our support. Here is an article hightlighting the mistakes to avoid when creating a performance dashboard.

There were two major milestones in accounting.

  1. The first was the popularization of the general accounting back in the '60s. This was the first real standardization of the measurement of a company.
  2. The second landmark was cost accounting in the '70s, seeking to find the profitability within the company's activities.

General Accounting

General accounting was the first major step in the standardized use of a management tool in companies. Accounting is the census and measurement of the flow of material, legal and economic facts of your company.

Who still wants to manage their business as their grandparents did?

It can be said that accounting is a management tool:

  • standardized, because it allows us to make comparisons between several companies based on a single tool;
  • chronological, because it provides a record of the operations that have changed the company's assets between two dates;
  • mandatory, since every company is legally obliged to keep accounts.

The era of general accounting started in the '60s. This means General accounting ages! Using it to drive the company is like having a 60 years old solution! Who still wants to manage their business as their grandparents did?

Plus, there are some limitations that do not reflect my concern as a business owner:

  • The fiscal year may - or may not - reflect the calendar of business operations.
  • Accounting accomodates poorly with having multiple currencies for the same partner.
  • There are accounting restatements that have no link with the real operational life.
  • Accounting posting might be recorded months after the event has happen;

Cost accounting

We jump to the 1970s, with the advent of the first spreadsheets.

Cost accounting was developed to complement general accounting. It is based on general accounting to present an economical image of the activity of the company for management purposes.

We have met only a few companies that can really assert they are doing cost accounting.

Cost accounting focuses on the profit and loss statement. It generates various restatements to highlight the profitability of the company's various profit centers or, more generally, the components of the selected areas of analysis (customers, distribution channels, products, etc.).

Keeping analytical accounts is not mandatory.

And, we have met only a few companies that can really assert they are doing cost accounting. And even fewer small companies. We have come across some in manufacturing and production companies.

If you want to do cost accounting, here are the few key principles.

  1. Define your profit centers (or the analysis axes you want).
  2. Assign them the revenue they generate.
  3. Assign them their direct costs (=those are directly linked to the production of an output).
  4. Define allocation keys between analysis axis. For instance, the allocation might be the percentage of total sales. The allocation should be relevant to the business model.
  5. Assign indirect cost using the pre-defined allocation key.
  6. It provides a profit per analysis axes.

That's an heavy job! And each year, you should update the allocation keys.

Is then accounting a real business management solution?

  • Accounting considers the company only from the point of view of its assets. Accounting lacks nuance in that it erases possible impacts on clients and processes. There are a lot of topics besides finance. Only a few people wake up in the morning to increase the return on capital employed.
  • Accounting requires a technical and financial background. However, many managers - especially those in small businesses - have not received any specific accounting training. We are convinced that a real management tool popularizes the concepts and makes them tangible for the common man.

Moreover, accounting only reports on what has happened. As business leaders, what could - or what will - happen is by far our concern than knowing what happened. I can prepare my company by forecasting my sales or recording anticipatively my revenue and expenses.

Knowing what happened is only relevant to learn how to avoid repeating the pattern again and again. We want to know what happened to understand and analyze it so that we can learn from it.

  • Accounting is an analytical tool, not a decision-making solution. It is a tool that is well suited for people who know - or think they know - what the (right) questions are. But the tool is not created for this purposes to make informed decisions. With accounting, I am presented a bunch of data. From that mass of data, I am the one the must know the right questions to be asked. Performing the analysis relies on me and myself. Drawing the conclusions is on me, again. And, I am in charge of making the decision.

A steering tool is built to present the decisions (or recommendations) that arise and then present the elements that have supported the reasoning. Making the decisions still relies on me, but I am confronted to the opinion of some-one/-thing else. This confrontation avoid cognitive bias.

So… Business Management Solution or not?

Not and definitively not.

As a manager, I can't just look in the rear-view mirror and react to events. I am looking for a dynamic management tool. I want to be able to take control of the situation: I want to become a proactive entrepreneur.

Proactivity means segmenting my customers, predicting my sales according to different scenarios, and planning my expenses and revenues. And all this, accounting doesn't allow me to do it.

We assert that accounting can't be a business management solution on its own for all those reasons. It might be with a strong educational background and steady business that is not subject to variation over time. Ok then, what is a business management solution? The next article will cover the topic of balance scorecard and OKR.

kopilot, digital CFO for SME.

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